Book: Options Futures and Derivatives , Author : Hull , Edition 6th, Page 76 S1: Spot price at time t1 S2: Spot price at time t2 F1: Future price at time t1 F2: Future price at time t2 b1: Basis at time t1 b2: Basis at time t2 Consider the situation of a hedger who knows that asset will be sold at time t2 and takes a short futures position at time t1. The price realized for the asset is S2 and the profit on the futures position is F1 - F2. Can someone explain me how is the profit on futures position = F1 - F2 ?

It does not mention about the expiration of the fiutures contract made at time t1 and t2, hence I think there is some assumption being made which I am unable to comprehend Would appreciate if someone could answer this for me ?

For this to make any sense, F1 and F2 should be referring to the price for the same futures contract. So lets say the futures price at t1 is $100 so F1=100. Assume that at t2 the futures price has dropped to F2=80. The profit for the short futures position entered at t1 and closed at t2 would be F1 - F2 = 20. This makes sense: we were short and the price went down so we made a profit.

Yes makes sense now… assuming F1 and F2 refer to same futures contract… So if go long at t1 when F1 = $100 you can close it at t2 by going short when F2 = $80. This would lead to a profit of $20. Hope I am correct ? Thanks

U guys need a life… please get one…

osei, you have enough time to log on to the forum and tell us we need a life…

I think the purpose of the question, is to reinforce the concept (and LOS) that as a futures expiration approaches, the spot price and futures price converge and that at expiration, they are equal. (If they weren’t, riskless arbitrage would be possible.) Thus, in the above question, at expiration we know S2 must equal F2. If we own something at a price of F1, then at expiration the profit is F1 - S2 or F1 - F2.